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If not Dilnot, what? The role of financial products in a public-private partnership Professor Les Mayhew Faculty of Actuarial Science and Insurance Cass Business School May 2012

Outline • Consider product solutions for people with different circumstances • Show how these align with the distribution of income and wealth • Show how they would interface with state support and how poorest in society would be protected • Provide examples and deal with implementation issues

Principles of a partnership model • • • • • •

Flexibility and choice Fairness and equity Help for those in greatest need Consistency and certainty Affordability (state and individual) Simplicity

How to mobilise private finance No one product will suit all needs or personal circumstances A variety of financial products are needed:

•‘point of need’ •‘point of retirement’ •‘anytime’

Examples of products •‘Top up’ insurance •Equity release products •Immediate needs annuities •Disability Linked Annuities •LTC bonds/trust fund

Disability Linked Annuities (DLAs) • Works likes a pension annuity and is actuarially fair • But: – Higher payments if become disabled – Even higher payments if go into care

• Can apply to any kind of pension – private, public sector and state pension alike

Example of a DLA based on lump sum of £100,000 Income per year (£000s)

Flat rate annuity DLA (1/2/3)

Failed 2 Failed 3 Healthy ADLs ADLs £6,730 £6,730 £6,730 £5,760 £11,510 £17,270

Income doubles when a person becomes disabled and triples when severely disabled

Extending DLA principles to state or public sector pensions Example of Attendance Allowance • Tax free benefit paid to people aged 65+ with a physical or mental disability or both • However, could be simplified by incorporating it within the state pension • Would increase as person became more disabled • Would be equivalent to a ‘DLA’

Why ‘Long Term Care Bonds’? • A large number cannot afford care, and have not saved for a pension • LTC bonds are like premium bonds that would pay cash prizes and accrue interest • Only cashable when needing care, otherwise value goes to estate or pays for funeral expenses • People on low income more likely to buy premium bonds, lottery tickets etc. • Potential to make a contribution to care needs in group that would normally have 100% of care needs met by the state

What is the market? Income-wealth map and product penetration

Assets £s

Key A= Equity release/INA B= Top up insurance C= DLA D= LTC bonds

Income £s Something for everybody…………

Interfacing private finance products with state support • Current means testing system too complex for most people • It is a disincentive to save and deters low cost private finance solutions • Unfair because people just above the threshold have no state support or limited means to insure against risk

Principles underpinning new system of public support • People receive something unless they are deemed self-financing • Support is based on both income and assets • System incentivises people to save or plan for their care • It should be affordable in public expenditure terms and stable over time • People can by-pass system if they wish

Combining income and assets into one scale £100,000

Basic formula



Notional years of support afforded = Value of assets divided by annual cost of care less annual income

Assets £s


4 years

£70,000 £60,000 £50,000


£40,000 £30,000 £20,000

e.g. At points P and Q

£10,000 £0 £0




Income £000



£80k /(£25k-£5k)= 4 years £40k/(£25k-£15k)=4 years

Individuals accessing state support are placed into wealth bands Suggested rates of support: A= B= C= D= E=

90% 70% 50% 30% 10%

>E Zero%

Example • Assume reckonable income is £10k per year and that care reference costs are £25k a year. A person in each band would receive up to : – A: £13.5k

= (£25k-£10k) x 0.9 shortfall £1.5k

– B: £10.5k

= (£25-£10k) x 0.7

– C: £7.5k

= (£25k-£10k) x 0.5 shortfall £7.5k

– D: £4.5k

= (£25k-£10k) x 0.3 shortfall £10.5k

– E: £1.5k

= (£25k-£10k) x 0.1 shortfall £13.5k

– >E nothing

= (£25k-£10k) x 0.0

shortfall £4.5k

shortfall £15.0k

Rates are illustrative. Actual rates would need to be affordable in public expenditure terms

Examples ÂŁ25,000

Cost of care limit ÂŁs per yr

Mrs White 40,000 6,000 46,000

Mr Black 0 25,000 25,000

Income State pension Occupational pension Attendance allowance Total

5,000 3,000 3,600 11,600

5,000 0 3,600 8,600

Notional years of care afforded Band Public contribution Income shortfall

3.43 D 4,020 9,380

1.52 B 11,480 4,920



Assets House Savings Total

Top up options Top up insurance LTC bonds Equity realease Immediate needs annuity DLA

Illustrative public support rates: A = 90%;





others: self funding

Assets £s

Income asset map with bands

Income £8,600 Assets £25000 Band B Public contribution £11,480 Shortfall £4,920

Income £11,600 Assets £46,000 Band D Public contribution £4,020 Shortfall £9,380

Income p.a.

Assets £s

Income asset map with bands M I N I M U M I N C O M E

ASSET RICH Professor Plum Professor Plum

S E L F -

Not eligible


Income £14,600 Assets £100,000 Un-banded Public contribution £ (zero) Shortfall £25,000

Current limit for support, £23,250

Income p.a.

Income and asset distribution in 65+age group Each point is an actual individual aged 65+

Assets ÂŁs


Data points are taken from ELSA, English Longitudinal Study of Ageing ELSA contains data on older people relating to health and disability, economic circumstance, social participation, networks and wellbeing.


Income p.a.

Wealth ‘heat map’ based on 65+ population Contours are deciles of population

Under present system ~22% could be under the threshold Under new system ~ 30.1% would get something

Percentage of 65+ population by band % people 65+ by band A – 19.8% B - 2.1% C - 2.2% D – 2.8% E – 3.1% Self funding 69.9% (>5years)

But shouldn’t we focus on the age group most likely to need LTC?

Cohort effects % of individuals by band reaching age 85 in given years Band A B C D E >E

2010 29.9 2.4 2.8 2.6 2.6 59.7

2015 26.3 3.5 3.0 3.6 2.6 61.0

2020 21.1 1.6 2.4 2.7 2.6 69.6

2025 15.9 2.1 1.8 2.7 3.5 74.0

In 2025 the proportion that cannot self fund for more than 1 year goes down because of increased housing wealth

All 19.8 2.2 2.2 2.8 3.1 69.9

Dealing with longevity risk Year 0

Year 5

What happens to people in care for years? Answer: A person moves from original band to a more most generous band

Summary of key proposals 1. Control of public expenditure • •

through the reference cost of care (e.g. £25k) the banding structure and top up rates

2. Equity through universal assessment and equal treatment of people with different means 3. Flexibility and choice through the range of products and ways of meeting costs 4. Market certainty and stability Through clear set of universal and predictable rules

Timing and investment issues • New products take time to mature and reach a steady state • Implies that private finance funding mix will gradually evolve with equity release likely to be most popular initially • Investment e.g. in computer systems would be borne largely by private sector providers • Some up for costs e.g. where local authority pays for care but recovers cost from estate • Some public investment might be needed for monitoring and regulation purposes

END References Mayhew, L., M. Karlsson, and B. Rickayzen, B. (2010) The Role of Private Finance in Paying for Long Term Care. The Economic Journal, Vol 120, Issue 548, F478–F504, November 2010 Karlsson, M., Mayhew L, Rickayzen, B. (2007), 'Long term care financing in four OECD countries: Fiscal burden and distributive effects', Health Policy, 80(1), p.107-134 Karlsson. M, Mayhew L, Plumb.R, Rickayzen.B, (2006), Future costs for long-term care: Cost projections for long-term care for older people in the United Kingdom, Health Policy, 75(2), p.187-213

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